IMF Rules Out Great Depression; World Economy To Grow 3%

Source : The Business Times, October 9, 2008

But this is provided the right policy actions are taken, says official

THERE are 'tough times ahead' for the world economy in the wake of the financial crisis, but the risk of another Great Depression is 'virtually nil' provided the right policy actions are taken, IMF economic counsellor Olivier Blanchard declared yesterday.

The global economy should grow by 3 per cent this year, with continuing expansion in China and other emerging markets offsetting zero or negative growth in advanced countries, he said.

The 3 per cent growth is 'on the borderline of recession' and things could turn out much worse if coordinated monetary and fiscal actions are not taken by leading economic powers, he added. He described the 50 basis point coordinated interest rate cut announced yesterday by major central banks as a 'step in the right direction', but emphasised that more needs to be done on the monetary front.

Among the coordinated policy actions needed are recapitalisation of banks, using public funds, and also the public purchase of impaired assets from the financial system, the IMF official added. Fiscal steps should also be directed mainly at shoring up the financial system.

Countries in Asia with large foreign exchange reserves, such as China and South Korea, are expected to draw on their holdings to offset problems in their economies. This is 'proper use' of such reserves to buffer against domestic shocks and should not have any major adverse impact on the US government debt market where the bulk of those reserves are invested, Mr Blanchard said.

In its latest World Economic Outlook released yesterday, the IMF said that the world economy was entering a major downturn in the face of the 'most dangerous financial shock in mature financial markets since the 1930s'.

Global economic growth will slow sharply this year and even a modest recovery is unlikely before the second half of 2009, the IMF said, adding that 'the situation is exceptionally uncertain and subject to considerable downside risks'.

The report came as finance ministers and central bank governors gathered in Washington for this week's annual meetings of the IMF and World Bank. The meeting is their first chance to hammer out joint policy action since the financial system crisis gained dramatic momentum last month. Hope is particularly focused on this weekend's meeting of G-7 finance ministers.

IMF officials said yesterday that concerted action by governments is essential to contain a crisis that has taken a huge toll on banking and financial systems and could trigger a global economic crash.

IMF managing director Dominique Strauss-Kahn has said that 'the time for piecemeal solutions is over', and has called on governments to 'coordinate efforts to bring about a return to stability in the international financial system'.

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'You change the cost of liquidity for the banking system, but are banks going to pass this on in terms of Libor? The full 50 basis points is not going to be passed on to the rest of the economy. Will the quantity of lending change? - probably not.'

- Willem Sels, head of credit strategy, Dresdner Kleinwort, London


'Coming in combination with the UK Treasury announcements this should be enough to assist equity markets, at least for now.'

- Geoff Kendrick, strategist, UBS